Jean Pruden v. Minister of National Revenue, [1974] CTC 2241

AW Prociuk (orally: May 15, 1974):—The appellant, Jean Pruden, appeals from the respondent’s reassessment for the taxation year 1968, wherein an amount of $8,095.15 representing one-half of the accounts receivable was added to his income.

The appellant and his late brother, George William Harvey Pruden, carried on a business as well drillers in partnership under the firm name and style of Pruden & Sons in and about the Town of Selkirk, Manitoba until the said brother died on July 9, 1965. Ann Pruden, widow of the deceased, became entitled to one- -half of the said business by virtue Of her late husband’s will, which was duly probated on December 8, 1966. Difficulties and disagreements between the appellant and Ann Pruden resulted in ‘the’ business being discontinued on January 31, 1968.

By agreement dated April 18, 1968, filed as Exhibit A-1, the appellant purchased Ann Pruden’s 50% interest in the said business on terms and conditions as set out in some detail in the said Exhibit A-1.

With reference to accounts receivable, I quote the last paragraph on page 2 of the agreement as well as paragraphs 3(a), (b) and (c) on pages 4 and 5, and which read as follows:

AND WHEREAS for the purposes of this Agreement the accounts receivable of the business are to be determined, in accordance with generally accepted accounting procedure, by Messrs Vopsi, Matheson, Green & Company, the auditors of the business (and hereinafter called “the auditors’’)—such determination to be made as at March 1 AD, 1968.

And then paragraph 3 commencing on page 4 of the said agreement reads as follows:

3. The Purchaser hereby agrees to forthwith purchase from the Vendor, and the Vendor hereby agrees to forthwith sell, assign and transfer and set over unto the Purchaser, as a going concern, all of the right, title and interest of the Vendor in the business. It is stated to be the intention of this Agreement that the Vendor is selling her interest in the business as distinct from her selling her interest in the assets of the business. Notwithstanding the foregoing part of this paragraph, it is agreed that the purchase price being paid is as between the parties apportioned as follows, such apportionment however not to affect the sale of the business as a going concern and as a whole entity:

(a) Accounts receivable to be determined as hereinbefore set out,—One ($1.00) Dollar;

(b) All office equipment, trucks and automobiles (with the exception of the automobile more particularly described in paragraph 10 hereof, and now in the Vendor’s possession), machinery and equipment, and the like as more particularly set out in Schedule “A” hereto—Eleven Thousand ($11,000.00) Dollars; and

(c) For all cash on hand and cash in the bank, and for all the remaining equity of the Vendor in the business, and for the right hereby given to the Purchaser to continue to use the name ‘‘Pruden & Sons” if he so desires, and for goodwill—Twelve Thousand, four hundred ninety-nine ($12,499.00) Dollars.

That is to say for an aggregate purchase price of twenty-three thousand, five hundred ($23,500.00) Dollars, payable on or before the date of closing hereof.

The accounts receivable of the business were determined as $16,191.29.

The appellant and Ann Pruden availed themselves of the election opportunity offered by subsections 85D(1) and (2) of the Income Tax Act, and completed Form T2022, filed as Exhibit R-7, setting out the total accounts receivable and the consideration of $1 paid by the purchaser. The fact that the appellant already owned 50% of same was subsequently drawn to the respondent’s attention and the figure was corrected to one-half of the total.

The appellant was represented by W Green, CA, who submitted that assuming the liabilities of the business the appellant ought to be able to deduct same from the accounts receivable as assumption of liability is also part of the consideration.

The agreement (Exhibit A-1) in my humble opinion does not support this submission. It is obvious that the portion dealing with accounts receivable and the consideration therefor was of some benefit to Ann Pruden. Both parties were represented by solicitors when the agreement and election form T2022 were executed.

Apart from the mathematical error referred to above, which was promptly corrected, there is no evidence to indicate that the parties to the agreement were in any way misled or tricked into signing same. The agreement is unambiguous and speaks for itself.

The respondent in principle is and remains a third party acting on the election filed by both parties but not necessarily bound by it. It is doubiful whether he would have to accept a reversal of the election If both parties had requested it, let alone only one party to the agreement and election.

Subsection 85D(2) of the Income Tax Act reads as follows:

85D. (2) An election executed for the purposes of subsection (1) shall contain a statement by the vendor and the purchaser jointly as to the consideration paid for the debts sold by the vendor to the purchaser and that statement shall, as against the Minister, be binding upon the vendor and the purchaser insofar as it may be relevant in respect of any matter arising under this Act.

In Coleman C Abrahams v MNR, [1967] 1 Ex CR 314; [1966] CTC 694: 66 DTC 5453, President Jackett, as he then was, stated as follows at page 332 [710, 5462]:

. . .l content myself with saying that, as it appears to me, subsection (2) of of Section 85D makes the statement provided for therein binding on the vendor and the purchaser (but only “as against the Minister”). It does not make the statement binding on the Minister. Neither the language nor the scheme of the provision supply any reason for preventing the Minister from inquiring into the veracity of the statement.

In view of the conclusions reached as stated above, the appeal is dismissed.

Appeal dismissed.